Abstract: Describe the reasons of trading short put stock options of Palantir, and share the advantages and disadvantages of this strategy.
Transaction detail
Today I am sharing with you about the transaction I made on June 10, the detail is as follows:
- Short put
- Palantir Technologies Inc（US stock ticker：PLTR）
- 500 units of stock option
- Expiration: 2021-06-25
- Strike price: US$23
- Stock price at transaction: US$24
- Option price: US$0.48
- Commission fee: US$3.5
- Premium received: US$236.5
Palantir stock 30-day chart
A little bit about Palantir
Palantir is a specialized big data analyzing technology company that I believe has a great potential in the future. Based on the fact that my career is somehow related to the field of big data, plus I personally am highly interested in this technology, I had taken some online university courses about big data programming. Overall, I think the technology of big data analysis and application will be proliferated in the future, and its corresponding industry market production will increasingly thrive on a year-over-year basis. Therefore, a company like Palantir that has the forefront specialized big data technology, I believe its revenue will grow continuously. Since this article is focused on the transaction and the reasons behind it, but not about the fundamental analysis of Palantir, I will make time to analyze this company in the near future.
A bit revision on the short put strategy
I did short put the option of Xiaomi previously on June 9, you may see here in detail where I have explained all about short put. Basically, when I do short put, we think that the stock will rise. And if the stock price does not fall below the strike price, the option premium will be earned safely. But, let me stress one important point here again, we should not just think about earning the option premium and ignore the risk associated with it, instead we should prepare for the worst at any time, be prepared for the stock going up or down.
Why short put Palantir?
The reason why I did short put Palantir this time is almost the same as the last time I did on Xiaomi. Previously, I had a certain amount of Palantir stocks, but in the early June when Palantir had risen quite significantly while FAAMG had dropped, I took the chance to shift the fund from Palantir to the big American technology companies. Although I think Palantir has quite a good potential, comparatively my faith on FAAMG is however much higher. I think when you decide how much fund you should put on a certain stock in a portfolio, it should always be proportionate to the faith you have on this company; otherwise, you will not be able to hold it for a long time. After that, since the stock price of Palantir has started to drop recently, I intended to see if I will have chance to buy it back at a lower price. According to my short put strike price and option premium received, the unit cost will be about US$22.52 if the option is to be executed and I am quite comfortable with this price. On the other hand, if it rises instead, I will also be happy to receive the 2% option premium return, the calculation of this return rate can be found in the previous article.
Can we continuously and regularly use short put to earn money?
Some people want to do short put or sometimes with covered short call to earn option premium like collecting monthly interests regularly in the long term. To be honestly, I also had this thought before. But I can tell you from my real experience, it definitely does not work. Depending on how lucky you are, you may earn a few times before you lose them all in the end. First, if you are not ready to buy the stocks for the short put after reaching the strike price at expiration, then you are very likely to choose to close the option before the expiration when the stock drops to almost the strike price; at this moment, you will realize the loss immediately by buying back the put option at a much higher price than your originally received option premium. Or you may not think closing the option before expiration is a correct choice and so buy the stocks at the strike price after the option being executed at expiration, since you may not have enough knowledge and faith on the stock you bought, it is very likely you will sell the stocks at a lower price to realize the loss as well in case of market collapse. Therefore, let me stress one important point again and again, if you are not ready to buy the stocks, do not short put the stocks. In another situation, someone may think, it is okay to just buy the stock at the strike price on expiration, because we may easily sell the stocks by doing covered short call the next month.
What is covered short call?
If you already know what covered short call is, you may skip this paragraph. If not, then there is a strike price that is usually higher than the current stock price, and when you short call a certain stock, if its price rises over the strike price at expiration, you will have to be sell the quantity of stocks at the strike price at expiration, and you will face either of the two situations:
- If you do not have enough quantity of the stocks at expiration, you will have to buy the stocks at the market price and then sell the stocks at the strike price.
- If you already have enough quantity of the stocks at expiration, then you just need to sell your stocks at the strike price. In this situation, it is called the covered short call.
Is it really that easy to earn the option premium by repeatedly doing short put and covered short call?
The answer is of course no just as what I have told you above. Why cannot it work? Let us assume you bought the stock at the strike price, say $100 for the short put you did at the first time. Then you intended to do the covered short call at strike price $100 (or even higher) next month, if the stock price really rises over $100 at expiration next month, of course you will be happy to cash out the transaction and earn the option premium at the same time in a happy ending. But the fact is always not that ideal, if instead the stock price continuously drops to say $90, it is true that your covered short call has not been executed and the option premium has been earned, but you actually are suffered from the 10% unrealized loss from the $100 cost you bought the stock. Although you can certainly do the covered short call again next month, but then what strike price will you choose? You may think it has to be over $100 or you may lose from selling at the strike price. However, since the stock price has dropped to $90, the option price of the call option at strike price $100 is now selling at a really cheap price, maybe just less than 1% of the premium return rate. And if you really risk choosing lower strike price say $95, you may finally realize the loss by selling the stocks at the strike price at expiration.
In sum, what is the correct attitude for doing short put and covered short call?
For short put, just as mentioned above, you should always prepare for the stock price going up and down. If it really drops, you should just unemotionally buy the stocks at the strike price and also be psychologically prepared for the stock price continuously dropping.
For covered short call, firstly, never try to do (naked) short call, or the risk may turn out to be huge, since the stock price may rise significantly just before expiration and you will have to buy high and sell low. So, what is the right timing for doing covered short call? My view is that if the stock price happens to rise to the point that you think you should reduce your position in the portfolio appropriately, you may disciplinedly sell the stock at the right price by adopting the covered short call strategy.
Comments and sharing
I am going to finish it here. If you have any questions, please feel free to leave a message or comment below, I will reply you. Or if you find anything incorrect in the article, please let me know and learn from you. If you find it interesting or it may help you in any sense, please share with other people.
